How NBN intends to reach its revenue goal of $52 per user

The company building Australia’s National Broadband Network, NBNCo, have said on many occasions, that they are confident of reaching their $52 ARPU (Average Revenue Per User) target at the end of the rollout in 2020. This is important because it underpins the value of the company as a whole and therefore any discussions of whether there should be a writedown in the debt that it owes to the Commonwealth.

They have made much of their various business offerings including Enterprise Ethernet and the business bundles as how they will raise this extra revenue. However they have really only hinted at where they actually expect most of this extra revenue to come from: CVC Overage.

A quick recap: CVC is the bandwidth charge that NBNCo levies on RSPs for the amount of bandwidth that they deliver to NBN for delivery to their customers. It was the cause of much argument in the latter half of 2017 as RSPs were clearly restricting their CVC purchases (in order to keep their retail prices down), allowing their customers to get very congested connections. Most people blamed NBNCo’s choice of FTTN, HFC etc as being the root cause of the poor performance, rather than the RSPs buying decisions around CVC.

NBNCo temporarily solved the problem by offering first “Focus on 50”, then the bundled plans that included enough CVC (at the time) for a reasonable discount to the RSPs.

Over the course of 2018 many RSPs took up Focus on 50 and then the bundles and the ACCC reported that congestion seemed to be a thing of the past. But is it?

The sting in the tail with taking on the bundles is that an RSP has to commit to not congesting their CVC – in other words NBN does not want them to sell a congested product over the NBN. They do this by explicitly stating that they must not exceed 95% utilisation for more than 7 hours in any 7 day period – there’s more in there, but that’s the gist of it.

The amount of CVC included in the bundles is 2Mbps for an nbn50 connection and 2.5Mbps for an nbn100 and above. However Australia’s bandwidth is currently increasing at about 40% per year and doesn’t look like slowing down anytime soon, indeed with the growth of high definition TVs it is only set to accelerate. So if 2Mbps was enough a year ago, it would need to be 2.8Mbps now just to keep pace with this growth.

So if you’re an RSP selling unlimited data plans what do you do? You can’t constrain your users (or even get more money from them by upgrading to higher data download plans) yet you also can’t let your CVC become congested. You just have to buy more CVC – more than the included bundled amount – to avoid congestion. This extra amount is called “CVC overage” and NBN currently sell this for $8/Mbps/month.

So some quick maths, if you are selling an nbn50 with its 2Mbps of included CVC, but actually have to allocate 3Mbps to avoid congestion, now instead of that connection costing you $45 per month, you are now looking at $53 per month. NBNCo’s revenue problem solved!

So will the RSPs actually stump up the extra money? If history is anything to go by, it is not looking good. Most RSPs are already complaining that they are making no money from NBN products so they have little incentive to play ball.

The good ones probably will go ahead and they will either have to stop selling unlimited plans or put their prices up. The others will simply restrict the bandwidth before it reaches NBN to keep it below the 95% threshold that NBN have set, in order to stay within the rules. So we will be back to 2017 with its congested networks all over again. At which time we can expect the finger pointing to restart.

NBNCo is clearly banking on RSPs buying this overage, only time will tell if they actually do.

For the record at Launtel we are already finding that the allocated CVC bandwidth with the bundles is not enough for a congestion free service and have started buying CVC overage. We believe that a high quality, low congestion, network is our primary goal, even if it means we have to charge more than the others.

Damian Ivereigh
18 Feb 2019